Nortel took reserves for restructuring that were overly conservative, thus understating GAAP earnings for 2001, 2002. As it became clear that the reserved funds would be unnecessary, they were reversed through the income statement during 2003, thus inflating GAAP earnings. Conveniently, Nortel had stopped issuing Pro Forma results for 2003 and did not call out these reversals as non-recurring items. As a result, analysts incorrectly assumed that the level of profitability reported during 2003 set a trend that could be used to predict future profitability.
Based on the company's statement that 2003 GAAP earnings would be cut in half, and noting that half of 2003 GAAP earnings were from discontinued operations, essentially, Nortel made no profits from continuing operations in 2003. This means Nortel's overall margins were no better than Lucent's for the year. Moreover, Nortel executives pocketed $50M in "return to profitability" bonuses that were based on fraudulent reports.
We don't know what the trend on margins really is at Nortel, so it's pretty tough to know what the stock should be worth. Furthermore, we'll have months of shareholder litigation, debt renegotiation and executive perp walks to slap the stock down everytime it tries to rally. |
